In The State of Inclusion in the U.S. Financial System: Benchmarking Progress, Gaps, and Disparities, we proposed four “North Star” outcomes to measure the financial lives of U.S. adults: financial stability, resilience, wealth, and well-being. Guided by these outcomes, we laid out a suite of financial services and products that households need to be able to access, use, and derive benefit from in order to achieve financial well-being. However, the data show that despite advances in our understanding of customer needs, product innovation, and technological disruption, we have yet to achieve a truly inclusive financial system.
In order to understand where changes to the financial system might drive the most benefit to households, we convened a Working Group on Inclusive Finance. This working group brought together changemakers from financial institutions, technology companies, nonprofit and civil rights advocates, and other experts in the field. At a convening on August 29, 2023, we asked the working group to help us prioritize five issue areas in the financial system that, if addressed, would unlock key components of an inclusive financial system.
In a series of working sessions over six weeks, more than 65 participants shared insights with us and provided advice for Aspen FSP’s recommendations across the five priority issue areas. In each, we defined the problem, identified the benefits to consumers of solving this issue, and proposed solutions or tools that would meaningfully impact households’ ability to access, use, and benefit from a full suite of financial services and products.
The five priority issue areas they worked on were:
- Managing Short-Term Liquidity Needs
- Credit Scoring and Pricing Risk
- Creating a Win-Win for Consumers and Providers
- Verifying Identity and Fraud Prevention
- Fueling Market Innovation and Consumer Opportunity through Open Finance
Below we outline how we define each problem, and pose a prompting question: How might we, as leaders in financial security, work within our own sphere of influence to address this problem?
Managing Short-Term Liquidity Needs
Consumers have uneven access to safe, affordable, and timely sources of liquidity when there is a gap between income and expenses. Nearly half of all families would face some difficulty in coming up with emergency funds within 30 days. This problem is not limited to low-moderate income households or to unpredictable emergencies. Too often, people will turn to expensive debt products to cover these shortfalls, leading to long-term financial instability. In order to build financial resilience, consumers must have access to products and services to manage cash flow and liquidity needs for today and build reserves for future financial shocks. Some market innovations are gathering steam; small dollar credit, real-time payments, emergency savings, and insurance products all can play a role in helping consumers manage their cash flow, but none have reached the scale needed to displace high-cost products that have filled the market gap.
How might we improve households’ ability to access, use, and benefit from short-term liquidity solutions to manage a mismatch between income and expenses?
Credit Scoring and Pricing Risk
Today, almost half of adults do not have a prime credit score; 22 percent of adults have a subprime credit score and 19 percent do not have enough information in their credit history to be assigned a credit score.
As uncertainty about a potential borrower decreases, access to credit will increase. Many consumers have valuable information that would more accurately quantify their risk as a borrower, including cash flow data and payment history such as rent and utility payments that are not included in a credit file. Providers are interested in serving a broader range of consumers but need better information in order to price their risk. Without a better way to price risk, many people will end up paying more and often fall prey to predatory practices, trapping them in cycles of debt that lead to greater vulnerability and less resilience, instead of putting them on a path to build wealth. In addition to lenders, credit scores are important factors for other constituents, e.g. employers, insurance companies, etc., which can have a meaningful impact on a person’s ability to create wealth.
For consumers who currently face challenges accessing sustainable and responsible credit, how might we remove barriers that prevent the collection and use of information that would more accurately price risk and assess their ability to repay?
Fueling Market Innovation and Consumer Opportunity Through Open Finance
The opportunity of Open Finance could, if regulated and managed effectively, drive benefits to previously un- and under-served consumers in today’s marketplace. In the U.S., innovation in consumer-permissioned data sharing could lead to benefits for consumers in personal financial management, simplified payments, and access to lending and credit. At the same time, the CFPB is writing rules (1033) to enable greater consumer-permissioned data sharing options for financial data that could help to drive more competitive marketplaces, lower costs of financial services, and speed innovation that tailor product and service offerings to consumers.
How might we drive the benefits of competition–namely lower costs, better services, and user experiences–to more consumers by making it easier for consumers and providers to safely and efficiently share data through open finance?
Verifying Identity and Fraud Prevention
True financial inclusion requires consumers to be able to access, use, and benefit a suite of financial products and services. While providers want to unlock this suite of services for a broader range of consumers, they must be able to verify the identification of users and prevent bad actors from entering the system.
Identity verification continues to be a stumbling block to access. Whether it is consumers who lack a mainstream form of identity such as a driver’s license, a U.S. passport, or a social security number; consumers who have recently moved or are experiencing homelessness; or those with gender identities that don’t align with their previously issued ID, our system today has not seamlessly integrated these use cases.
In addition, the cost of fraud prevention and compliance is on the rise which affects both institutions and consumers. When providers look for suspicious behavior, legitimate consumers can be inadvertently locked out of potentially valuable services, further eroding consumer trust in the U.S. financial system.
With so much progress and technological innovations unfolding, how do we ensure progress does not exacerbate exclusion and drive benefits to consumers from these innovations?
Creating a Win-Win for Consumers and Providers
There is a tension between wanting to serve more low-moderate income consumers and the ability to offer products and services and/or scale existing ones in a sustainable way for providers in the long term. This is partially driven by the incentive structure of banks alongside the history of financial institutions, which were originally designed to serve affluent customers. This is also driven by more systemic harms which facilitated the exclusion of consumers of color and low-income consumers.
Consumers continue to need more products that facilitate real-time access to funds, access to affordable credit, and investment for smaller dollar amounts than the typical mass market customer. Financial institutions have not always provided these products as the cost of customer acquisition, risk management, and servicing these accounts may be perceived as being higher than the revenue generated. In addition, the typical revenue model for providers reflects individual products and services, rather than a holistic view of a consumer’s financial life cycle–a siloed view that causes consumers to miss out on potentially beneficial products and services. As a result, offering a sustainable set of products and services to underserved and excluded consumers often exists as a priority for one or more departments (e.g., diverse segments, corporate social responsibility), but not across core lines of business.
How might we rebalance the financial system to account for the mismatch between long-term consumer health and incentives for financial service providers?
While each of these issue areas has unique solutions that would unlock part of the financial system for more households, there is also significant overlap across them. At their core, these issues drive toward an individual’s access, use, and benefit from the totality of the financial system. Join our public event on December 5 to hear from changemakers in government, industry, and nonprofits about their role and leadership in developing a national financial inclusion strategy–and our collective charge moving forward. Informed by these perspectives, we will unveil a set of recommendations and chart a path of action for making our financial systems more inclusive.